All Perspectives
34 Perspective(s) trouvé(s)
    10 July 2019
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    A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
    Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
    With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
    Although Japan’s economic openness is relatively limited, the high concentration of Japanese exports to China, and the other Asian countries in general, creates a major external risk for the dynamics of Japanese growth. This situation is squeezing the manufacturing sector, but for the moment, its difficulties do not seem to have carried over to the other sectors of the economy. The VAT increase planned for October should encourage households to make some early purchases, while the high level of uncertainty is hampering corporate investment. In this environment, the Bank of Japan is expected to maintain a very accommodating monetary policy, although this is unlikely to trigger a sustainable upturn in price inflation.
    The months pass but nothing seems to change. Growth in the manufacturing sector is struggling to accelerate in a persistently uncertain international environment, while buoyant domestic demand is boosting activity in services. The stronger-than-expected first quarter performance sends a more optimistic message than economic surveys. Faced with a downturn in inflation expectations and the downside risks to the Eurozone’s economic scenario, the European Central Bank (ECB) has been proactive again. It is prepared to ease monetary policy further and the new measures have been set up much earlier than expected. Yet faced with stubbornly mild inflation and only limited manoeuvring room, the ECB is bound to take a frugal approach.  
    As international trade slows, the economy is mainly supported by expansionary fiscal and monetary policies and real disposable income growth. After a mild contracted in Q2, the economy is expected to grow modestly in the second half of the year. In 2020, exports may strengthen again and growth could return to close to potential. Due to its deep integration in global value chains, Germany is relatively hard hit by the global trade slowdown. This integration has undoubtedly brought benefits by improving productivity and skill-intensity. However, it has also accentuated income inequality.
    The signs of stabilisation seen at the beginning of the year have been followed by improvements in confidence surveys. The upturn in consumer confidence has been the most marked and the most encouraging of these. The rather more mixed nature of the economic data available tempers these positive signals somewhat, and leads us to forecast stable growth in Q2, at 0.3% q/q, making this the sixth quarter in a row to see growth at around this pace. This stability, which is remarkable in and of itself, is likely to continue over the coming quarters according to our forecasts. It is a good sign of the resistance of French growth to downward pressures. Under our scenario, this resistance demonstrates a degree of effectiveness in the measures taken to support consumers and businesses.
    In Q1 2019, Italy came out of recession. The overall scenario remained mixed. The GDP annual growth rate was negative. Imports strongly declined and exports slightly increased, with a positive contribution of net exports. Both households and firms remained cautious, postponing consumption and investment. Cyclical indicators suggest a disappointing evolution in coming months, making more challenging the fulfilment of public finance objectives. The Italian Government approved an update of the 2019 Budget, with the public deficit around 2% of GDP, reaching an agreement with the European Commission and avoiding the disciplinary procedure.  
    Spanish growth is still robust, but that does not mean it is totally immune to the European slowdown. Although growth is expected to slow this year, it should have no trouble holding above an average annual rate of 2%. After winning April’s legislative elections, Pedro Sanchez is still seeking a majority that would enable him to head the executive branch and form a new government. Spain officially exited the European excessive deficit procedure recently. Although a budget has not been formally adopted for 2019, the authorities are aiming for a primary surplus.
    GDP growth is slowing due to the strong deceleration in global trade. Nevertheless, the economy continued to operate close to its potential until 1Q 2019 thanks to the strength of domestic demand, underpinned by strong disposable income growth and an expansionary fiscal policy. As the government has lost its majority in the Senate, it needs the cooperation of the opposition parties for passing new legislation. However, a government crisis is not imminent. Even if GDP growth is expected to slow below its potential in the coming quarters, public finance metrics will continue to improve up to 2020.
    Over the next quarters economic growth will remain stable. Rising labour market capacity constraints and a lower contribution by net international trade are weighing on the overall outlook. With also uncertainties in the international (trade war, Brexit) and national (government formation talks) context unlikely to dissolve anytime soon, our base case is one of below potential growth up until 2020.
    Denmark’s small open economy is bound to be hit by the economic slowdown affecting its main trading partners in the quarters ahead. Household consumption will remain the main growth engine thanks to job creations, wage growth and mild inflation. With consumer prices up only 0.7% y/y in May, inflation should remain mild. The Danish economy is also expected to benefit from an accommodating monetary policy in the quarters ahead, although this will depend on the policy stance adopted by the European Central Bank (ECB).
    Brexit has been behind thirty-seven resignations from the government responsible for managing the process, the latest being that of Prime Minister Theresa May herself. Having failed three times to get the Withdrawal Agreement through Parliament, she had little choice but to ask for an extension of the Article 50 period and then in the end to resign. The two candidates to take her place are the current Foreign Secretary, Jeremy Hunt, and his predecessor, Boris Johnson. Whilst Mr Johnson claims he can negotiate a changed deal and trigger Brexit from 31 October 2019 (the latest deadline), Mr Hunt plans to seek more time in order to renegotiate to allow for an orderly exit.
    The economic recovery continues. Growth is accelerating and for the moment it has reached the lower range of expectations. After four and a half years in power, Alexis Tsipras passes on the helm to Kyriakos Mitzotakis, leader of the centre-right New Democracy party, which has led in the polls since 2016. The new Prime Minister is unlikely to call into question the prescribed public finance trajectory as the country exits the European financing programme.  
    The robust GDP growth reported in 2018 is bound to slow this year. Sweden’s main trading partners have been hit by slowdowns, which is having a negative impact on export momentum. The slowdown in job creations will also strain household consumption. Yet it is the reduction in residential investment that is expected to curtail economic activity sharply in the months ahead. Although inflation should near the central bank’s 2% target by the end of the year, monetary policy will probably remain accommodating in the months ahead due to the uncertainty surrounding economic trends.
    19 April 2019
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    Recent data in China and the eurozone point towards a stabilisation of growth and have been met with relief. Although the US economy is slowing, growth should remain at a satisfactory level in the near term. Yet there are lingering concerns about the underlying strength of the global economy. The IMF has again scaled down its forecasts and only expects a modest growth pickup later this year. The flattening of the US yield curve fuels worries that growth will disappoint. The Fed insists it is confident about the outlook and patient in setting its policy. Markets have welcomed this accommodative message. Yet the signals sent by equity and bond markets about future growth are quite different. It only adds to the list of concerns.
    Although losing steam, the economic activity in the US is seen keeping on a rather dynamic path in 2019. The International Monetary Fund still forecasts a 2.3% increase in GDP this year, while delivering an increasingly cautious message in the meantime. The IMF recently pointed out several risk factors, including the record high corporate debt ratio, the opacity and less stringent standards on the leveraged loan market, and stretched equity market valuations. Moreover, the inversion of the yield curve is virtually complete, which in the past has always been an early-warning sign of recession.
    The eurozone’s manufacturing sector has been hard hit by the decline in foreign trade and persistently high uncertainty. Very open internationally, the eurozone is sensitive to global cyclical slowdowns. Internal macroeconomic fundamentals are still solid, and the rally in the services sector is showing resilience. The ECB has taken note of the longer than expected slowdown, and has opted once again for longer-term refinancing operations (TLTRO). Numerous risks still cloud the forecast horizon, which could darken rather quickly if any of these risks were to materialise.
    Since the middle of 2018, economic activity has virtually stagnated largely because of a slowdown in world trade. The most recent surveys and hard data confirm that weakness in the manufacturing sector continued in Q1 2019. Spearhead of the economy, the sector can become a source of vulnerability when world markets are less buoyant. However, Germany is able to support domestic demand. In 2019, the government will return to households and businesses a part of last year’s record budget surplus (more than EUR 50 bn).
    Business confidence surveys are showing signs of levelling off. Hard data for January and February are rather positive. These factors are consistent with the economy keeping up growing at about 1.2%, which is our growth forecast for 2019. Although this is not very high, it is synonymous with the resilience the French economy is expected to show in an environment marked by uncertainties and downside risks. The main factor behind this resilience is the positive impetus of economic and fiscal policy, notably stimulus measures to boost household purchasing power, and the expected ensuing rebound in household consumption.
    The Italian economy entered the third recession in the last ten years. In 2018, value added in the manufacturing sector recorded four consecutive contractions. Domestic demand disappointed, as both households and firms remained extremely cautious. Given the deterioration of the overall scenario, in the 2019 Economic and Financial Document recently approved, the Italian Government has lowered from 1% to 0.2% the GDP growth expected in 2019, with public deficit at 2.4% and the debt to GDP ratio at 132.6%. The structural deficit would worsen by 0.1%, to 1.5%. A progressive ageing of the population makes the scenario even more complicated.
    In a morose economic environment, Spanish growth stands out as one of the most resilient in the eurozone, and it seems to have entered the year at a very similar pace to the one in H2 2018. The main factors behind this resilience can be found on the household front, where the savings rate has dropped back to the low point of 2008. With only a few days to go before the 28 April general elections, the electoral landscape is still highly fragmented. Regardless of the outcome, the winning party will find it hard to form a sustainable majority coalition.  
    Industrial enterprises were squeezed by tighter financing conditions in 2017 and early 2018, and then hit by a slowdown in production and revenue growth last year. These troubles have contributed to the deterioration of their payment capacity, resulting in a surge in defaults in the local bond market. The increase in defaults is an indicator of the financial fragility of corporates, and also seems to be going hand-in-hand with greater differentiation of credit risks by lenders and a certain clean-up of the financial sector. These trends are expected to continue in the short term as the authorities conduct a targeted easing of monetary policy. However, the persistence of the debt excess in the corporate sector will maintain high credit risks in the medium term.
    After nearly five years in power, Narendra Modi’s track record is generally positive, even though the last year of his mandate was tough, with a slowdown in growth in Q3-2018/19. The main growth engines are household consumption, and more recently, private investment, thanks to a healthier corporate financial situation, with the exception of certain sectors. In full-year 2018, external accounts deteriorated slightly as a swelling current account deficit was not offset by foreign direct investment. A big challenge for the next government will be to create a more conducive environment for domestic and non-resident investment.
    The hopes of seeing economic activity pick up following the election of Jair Bolsonaro have fallen. Some indicators point to a possible contraction in economic activity in Q1 2019 at a time where confidence indicators were seemingly improving. Meanwhile, the reform of the pension system – a cornerstone of President Bolsonaro's economic program – was presented to Congress in February where it is currently under discussion. Negotiations will likely be more protracted and be more difficult than originally expected. Indeed, since taking office, the popularity of the Brazilian president has sharply declined and relations between the executive and the legislature have strained.
    Economic growth slowed in the first months of 2019, and is now close to its potential growth rate of 1.5% according to the central bank. A 2-point VAT increase on 1 January has strained real wage growth and sapped household consumption. Inflation (5.2% year-on-year in February) is still below the central bank’s expectations, and the key policy rate was maintained at 7.75% following the March meeting of the monetary policy committee. In the first two months of 2019, investors were attracted by high yields on Russian government bonds, despite the risk of further tightening of US sanctions. The rouble also gained 5% against the US dollar in Q1 2019.
    Economic activity in Japan remains in a slump, and the slowdown observed in 2018 seems set to last. Manufacturing activity deteriorated in the first quarter. In the short and medium term, Japan will continue to be hard hit by the slowdown in China, its main trading partner. Demographics are still a major problem in a country where the over-65 age group continues to swell and now accounts for more than a quarter of Japan’s total population. It serves as a constant incentive to boost productivity gains through large-scale structural reforms in the goods and services markets as well as in the labour market.
    By opting to leave the European Union (EU) without any exit plan, the United Kingdom has come face to face with an impossible choice. Week after week, the Brexit impasse has revealed the British Parliament’s incapacity to make decision, starting with the ratification of the divorce terms, the fruit of 2-years of negotiations by Prime Minister Theresa May. In the end, the Brexit was simply postponed. First set for 29 March, then 12 April, the deadline for exiting the EU has now been extended to 31 October (a Halloween treat?). This date could be moved forward if the UK finally manages to ratify the withdrawal agreement, which it has rejected time and again. But the most probable scenario is that the UK will extend its participation to the EU, at least for a while…
    24 January 2019
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    The slowdown is spreading widely. Although it is reasonable to expect growth to normalise, several sources of uncertainty (fears of a trade war, Brexit, the US government shutdown, etc.) are acting as headwinds. China has already announced new measures, and in the United States, the Federal Reserve is insisting on its patience (concerning inflation) and flexibility when it comes to adapting monetary policy.
    The assumption that the US economy is heading for a landing is gaining ground, not just because of the shutdown. The disruption created by the trade war with China, the appreciation of risk on bond and equity markets, the peaking of the energy sector and the deterioration of real estate indices all suggest less buoyant growth. This view is shared by the US Federal Reserve, which has adopted a more cautious tone and suspended the increase in policy rates pending future macroeconomic data.
    After an eventful first twenty years, the eurozone is moving into a new phase of uncertainty. Growth has slowed markedly, and economic indicators have deteriorated. With temporary shocks and structural drags on growth, 2019 brings numerous risks. Against this background, and faced with underlying inflation that remains too low, the European Central Bank (ECB) is taking a cautious approach to this new year.
    Economic growth has slowed markedly since the second quarter of 2018 and business surveys indicate that it is unlikely to change in the coming months. The exporting manufacturing sector is much affected by the slowdown in world trade. In the coming quarters, the domestic economy is likely to become the major engine behind growth thanks to an expansionary fiscal policy. More fiscal stimulus could be expected if the economy would slow further. This would also shore up the chances of the coalition parties at the next federal election set for 2021.
    2019 is getting off to a less strong start, with economic activity having taken a hit from the ‘gilets jaunes’ protest movement. The collapse in consumer confidence has been abrupt and the global environment looks less certain. Against this background, fiscal policy is being loosened: the new plan to support the purchasing power of lower income households, announced in response to December’s demonstrations, should help consumer spending to catch up, at least in part. It comes alongside measures already introduced in the 2018 budget to support consumers and companies. French growth is therefore likely to show signs of resistance.
    At the end of 2018, Italy and the European Commission agreed on a new 2019 Budget Law, avoiding an Excessive Deficit Procedure. The 2019 public deficit has been lowered to 2% of GDP from 2.4% previously planned, and real GDP growth has been revised downward to 1% from +1.5%. This is still a challenging scenario as overall conditions in the Italian economy worsened in H2 2018. In Q3, GDP fell by 0.1% as investment, both private and public, significantly declined. After the downturn in September, exports in Italy recorded a +9.6% y/y increase in October, while they stagnated in November bringing the value of the sales abroad to 427 billion euros in the first eleven months of the year.
    The current slowdown is in keeping with the European economic cycle. Prospects are still looking relatively good, and Spain’s expected growth rate is among the highest of the big eurozone countries. Unemployment is falling rapidly but it is still massive, especially long-term unemployment. Prime Minister Pedro Sanchez just presented his 2019 budget proposal to Parliament, but he is not sure it will pass. In any case, the deficit most likely slipped significantly below 3% of GDP in 2018, and Spain is preparing to exit the excessive deficit procedure that was launched 10 years ago.
    Economic growth slowed to 6.6% in 2018 from 6.9% in 2017 and should continue to decelerate in the short term. The extent of the slowdown will depend on the still highly uncertain evolution of trade tensions between China and the United States as well as on Beijing’s counter-cyclical policy measures. However, the central bank’s manoeuvring room is severely constrained by the economy’s excessive debt burden and the threat of capital outflows. Moreover, whereas Beijing has pursued efforts to improve financial regulation and the health of state-owned companies over the past two years, its new priorities increase the risk of interruption in this clean-up process. Faced with this situation, the central government will have to make greater use of fiscal stimulus measures.
    India’s economic growth slowed between July and September 2018, hard hit by the increase in the oil bill. The sharp decline in oil prices since October will ease pressures, at least temporarily, on public finances and the balance of payments, and in turn on the Indian rupee (INR), which depreciated by 9% against the dollar in 2018. In a less favourable economic environment, Narendra Modi’s BJP party lost its hold on three states during recent legislative elections.
    The election of Jair Bolsonaro at the presidency of Brazil has marked a swing to the right, the weakening of traditional political parties and a return of the military to national politics. The new administration faces the challenges of rapidly engaging its fiscal reform, gaining the trust of foreign investors while reconciling ideological differences across its ranks. How society will adjust to a new era of liberal economic policy remains the greatest unknown. Meanwhile, the economy is still recovering at a slow pace. Supply-side indicators continue to show evidence of idle capacity while labour market conditions have yet to markedly improve. Sentiment indicators have shown large upswings in recent months which should help build some momentum in economic activity over Q1 2019.
    In 2018, Russia swung back into growth and a fiscal surplus, increased its current account surplus and created a defeasance structure to clean up the banking sector. The “new” Putin government affirmed its determination to boost the potential growth rate by raising the retirement age and launching a vast public spending programme for the next six years. Yet the economy faces increasing short-term risks. Monetary tightening and the 1 January VAT increase could hamper growth. There is also the risk of tighter US sanctions, which could place more downward pressure on the rouble.    
    The COP24 only succeed in agreeing on rules on measuring, reporting and verifying carbon emissions. In the meantime, the world is falling behind the objective to limit global warming to 1.5°C. CO2 emissions are set to rise to 2030, whereas they should peak by 2020. Countries are underestimating the urgency for action or held back by commercial interests. Moreover, environmental legislation is met by growing public resistance. It demands a better framing of climate policies. Moreover, the climate change discussion should be broadened to the WTO.
    On 15 January 2019, UK MPs rejected the proposed Brexit agreement reached by EU Heads of State two months earlier. With 432 of the 634 votes going against the deal, this result has significantly weakened Prime Minister Theresa May in future discussions with the EU and with Members of Parliament. Today almost anything looks possible, starting with a delay in the official date of the UK’s departure, currently scheduled for 29 March.
    18 October 2018
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    Growth has eased during the course of this year with the US being the major exception largely thanks to fiscal stimulus. The ensuing cyclical desynchronization has caused a broad-based appreciation of the US dollar, in particular versus emerging currencies. In some cases (Argentina, Turkey), the depreciation has been considerable due to country-specific developments. Global growth should continue to ease further next year and lead to a certain resynchronization: the impact of the US fiscal boost will wane, Fed tightening should start to have an effect and corporate investment is expected to slow, which in turn should weigh on world trade growth. Even in the absence of additional tariff increases, fears of more tit-for-tat measures could sap business confidence.
    With the approach of US mid-term elections, the Trump administration is doing a lot to deliver economic stimulus, through historic corporate tax cuts, increased military spending and financial support to farmers, which are the first collateral victims of the trade war with China. These actions are weighing on the Federal budget deficit, which reports one of its biggest increases ever outside of a recession. The trajectory of public finances seems hardly sustainable, while the rapid expansion of the economy could be also at risk. The full employment of capacities, the peaking of corporate debt ratios and high equity market valuations are all early warning signals of a slowdown, that could materialize as soon as 2019.
    Growth has been moderating in 2018, although remaining above potential. Prices pressure are increasing as signalled by high levels of capacity utilisation, declining unemployment and rising wages. As underlying inflation is projected to move towards the ECB’s 2% ceiling, the central bank decided to reduce net asset purchases and possibly halt them from January 2019. Policy rates will remain unchanged at least through the summer of 2019. The policy mix should stay expansionary and GDP growth may moderate towards its trend rate in 2019.
    Growth decelerated sharply in 2018, although remaining about potential. Tensions in the labour market have resulted in generous pay deals. Nevertheless, underlying inflation has remained subdued. Despite the mildly expansionary fiscal stance and very easy monetary conditions, the pace of economic growth may decelerate further in 2019 due to a worsening external environment. Labour market shortages may intensify in particular in the construction sector. The increase in unit labour costs will gradually spill over into higher consumer prices. Political tensions may intensify, but the prospect of defeat may be the glue that holds the coalition together.
    After a market soft patch in the first half of 2018, growth in France will probably get some colour back in the second part of the year, despite a less supportive external economic environment. Consumer spending should get a boost from tax cuts and increases in social minima planned for the end of the year. This positive impact is expected to last into 2019, buffering the growth slowdown. Other fiscal stimulus measures will also be at work, and the first results of the labour market reforms and the ‘PACTE’ growth and business reform act could start to show up.
    Economic activity has further decelerated. In Q2 2018 GDP slowed to 1.2% y/y. Also, the full recovery of the housing market is further delayed, as real estate prices decreased by 0.2% y/y in Q2. According to the draft budget, the deficit-to-GDP ratio is expected to stay at 2.4% in 2019 and then decline below 2% in 2021. In the government scenario, GDP would increase by around 1.5% in the coming three years, allowing the debt-to-GDP ratio to diminish to 126.7% in 2021.
    Although the Greek economy continues to recover, so far its performance has fallen somewhat short of expectations. After exiting the European financial assistance programmes, Greece’s executive arm has regained some freedom to act, although it is still under “enhanced supervision”. Finding the right trade-offs will be no easy task, between turning around domestic demand, maintaining competitiveness gains and consolidating public finances over the long term, especially with just one year to go before the next legislative elections.
    The Chinese authorities have responded to the economic slowdown and US trade barriers by loosening monetary policy and letting the yuan depreciate in recent months, while considering fiscal stimulus measures. With policies to boost demand, the economic growth slowdown is likely to continue at a moderate pace in the short term. Any rebound in investment, however, is likely to be limited, restricted by the deterioration of export prospects, corporates’ excessive debt, industrial restructuring measures and Beijing’s determination to promote healthier development in the real estate market. As to private consumption, it may not be strong enough to pick up the slack.
    Pressures have been on the rise since April 2018. Narendra Modi’s power has eroded. His party lost its majority position in the lower house of parliament. Growing difficulties in the financial sector have sparked higher refinancing costs. Despite solid growth in the first quarter of fiscal 2018/2019, the rupee has fallen to the lowest level on record after depreciating by more than 13% against the USD. India is vulnerable to higher oil prices (23% of imports) and capital outflows. Although its external position has weakened, India is nonetheless in a much more comfortable position than it was five years ago. At the end of September, foreign exchange reserves still covered 1.4 times its short-term external financing needs (less than 1 year), compared with 0.9 times in 2013.
    The economic, political and moral crisis that has held Brazil in its thrall for several years has crystallised in general elections that have seen a section of the electorate swing to the right. The Roussef and Temer presidencies – marred by corruption scandals and two years of deep recession in 2015 and 2016 – have provided a fertile ground for a further fragmentation of Brazil’s political landscape. The swinging of the political pendulum risks increasing social tensions at a time when the macroeconomic environment deteriorates as growth loses steam, investment contracts, government debt builds up and the external environment looks increasingly uncertain.
    Despite the improvement in economic fundamentals (strong rise in the current account surplus, accelerating GDP growth and a fiscal surplus), the rouble depreciated by 13% against the dollar between April and September 2018. Tighter US sanctions in April and again in August 2018, combined with the threat of new sanctions this fall, triggered massive capital outflows. Despite a highly volatile rouble, bond and money market pressures have been mild. To counter the downside pressure on the currency, the Russian central bank raised its key rates in September, for the first time since 2014, and halted its foreign currency purchases on behalf of the finance ministry.
    Activity is unlikely to pick up again after sluggish growth in the first half of the year. Jobs are, however, still being created at a solid pace, cushioning possible spill-over effects from the weakening external environment. Corporate investment remains rather slow, partly because of geopolitical tensions. The budget stance remains too accommodative, as further fiscal consolidation seems rather unlikely, given the upcoming federal elections in May 2019. Growth is projected to slow to potential and inflation could decline to 1.5% by end 2019.
    On 29 March 2019, the European Union and the United Kingdom will officially separate. Yet the terms of the separation have yet to be worked out. The Withdrawal Agreement, which is indispensable for a smooth exit, calls for a transition period of a little less than two years, through the end of 2020. It will to be discussed at the 18 October European Council meeting. Agreement on the divorce terms has always run up against the Northern Ireland question. Assuming the European heads of state and governments can solve this issue and a deal is finally reached, it would then be up to the UK Parliament to give its consent. This surely poses the greatest threat to a smooth Brexit.
    11 July 2018
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    Growth assumptions for the world economy remain at a high level in 2018 underpinned by a powerful combination of job creation, rising company profits and easy access to financing. Yet sources of concern have multiplied and others have become far more intense, leading to a sentiment of increased uncertainty. This is predominantly related to politics and economic policy, which leaves room for positive surprises, but if nothing changes, it could also result in ever stronger headwinds for consumer spending, business investment and international trade.
    President Trump’s trade war is becoming more real by the day. Citing national security concerns, the United States imposed aluminium and steel tariffs on its main trading partners in June. Retaliations followed, prompting the White House to decide further sanctions, first against China. The risk of escalation has never seemed so high, and clouds are beginning to loom over world trade. After applauding President Trump’s tax cuts, the equity and corporate bond markets are showing increased nervousness. So far, the US economy is maintaining momentum, but recent cyclical indicators are less euphoric.
    The slowdown in eurozone growth seems to fit within the “normal” progression of the economic cycle. After a period of strong growth, it is not surprising that activity returns to a pace more in keeping with fundamentals. In this environment, the normalisation of growth marks the beginning of the normalisation of monetary policy. But this should take quite some time. The ECB has already announced that it does not intend to raise key rates before summer 2019. The convergence of inflation with the central bank’s target will still require a high level of monetary support.
    Economic activity has slowed in the first half of the year. Business cycle indicators, on a declining trend since late 2017, have lately shown signs of stabilisation. They still point to robust growth, supported by rather accommodative monetary and fiscal policies. Economic growth is increasingly hampered by capacity constraints in particular in construction. Moreover, generous wage settlements and the lack of skilled workers will stimulate the offshoring of production capacity. Inflation should gradually increase due to higher production costs.
    In the first part of 2018, several factors undermined French growth, including temporary ones like tax increases and transport strikes, and imponderables, such as the upward pressure on oil prices. In the second half, growth is expected to accelerate again as domestic support factors regain the upper hand (healthier job market, planned tax cuts, and favourable financing conditions and economic policy). Dynamic world demand is another, more uncertain part of our central scenario, which places downside risk on our growth outlook of an average annual rate of 2% this year.
     At the beginning of 2018 the Italian economy decelerated. Real GDP rose 0.3% with negative contributions from both net exports and investment. Household consumption increased, supported by the recovery in the labour market. In Q1 2018, employment in Italy returned to its pre-crisis level thanks to the increase in the number of dependent employees. During recent years, the state of public finances has improved. In 2017, the public debt-to-GDP ratio fell to 131.8%. The new government have presented a detailed programme with the simplification of both fiscal and pension systems and the introduction of universal income support. The new minister of treasury stated that the new measures will be consistent with the goal of reducing the debt-to-GDP ratio. 
    The outlook is good. Although economic growth is no longer accelerating, it remains strong and is pushing down unemployment. The only cloud on the horizon is the slow pace of fiscal consolidation. That is less a deliberate policy than the result of difficulties experienced by minority governments since the end of 2016. Pedro Sanchez’s government was brought to power by a diverse majority, and could have at least as much trouble as its predecessor in implementing its policies. In the circumstances, we would not be so surprised if an early general election takes place before the scheduled date in 2020.
    Beijing is worried about the economic slowdown and its effects on the financial health of Chinese corporates. Domestic demand growth is weakening and the external environment is worsening, notably because of protectionist measures taken by the US. The authorities are adjusting their economic policy accordingly. They have slightly loosened monetary conditions, without changing their objective of cleaning up the financial sector and state-owned enterprises. They have also let the yuan lose 5% against the dollar in the last three months. It is now essential for the yuan’s depreciation to remain under control, in order to avoid any dangerous capital outflows and further pressure on the currency, as seen in 2015-2016.
    India has not been spared from the mistrust of international investors since April, even though growth has accelerated strongly. At a time of rising inflationary pressures, the central bank raised its key rates in June for the first time since 2014. This monetary tightening combined with the troubles reported by state-owned banks could strain the recovery of corporate investment, even though companies are in a better financial situation. Banks, in contrast, have accumulated financial losses of more than USD 9 bn following rule changes for the classification of credit risk. These losses account for nearly 75% of the amount of government injections into the banking sector in fiscal year 2017/2018.
    The recession is over, although there are signs that the recovery is flagging. Brazil has avoided a financial crisis. However, the fiscal situation remains very worrying and there is still a crisis of a political, social and even moral nature, with a general election also coming up in October. Against a background of emerging-market tension since March, international investors are worried that the next Brazilian administration might move away from the reform agenda. On the positive side, Brazil has addressed its macroeconomic imbalances – other than its fiscal ones – while its banks are solid and private-sector agents have deleveraged.
    Economic activity rebounded in Q1 2018 and the outlook for growth is still upbeat. Household consumption is expected to boost activity in the second half of 2018, bolstered by higher real revenues. Yet inflationary pressures could intensify with the rouble’s depreciation and the prospects of a 2-point VAT hike in January 2019. A gradual increase in the official retirement age starting in 2019 should help offset some of the structural constraints hampering growth potential, by increasing the share of the active population and reducing spending allocated to financing the pension fund deficit.
    Growth suffered from harsh winter weather at the start of the year and may have caught up slightly in the second quarter. However, the UK growth could slow down further because of the prospect of trade conflict with the United States, along with Brexit uncertainties. The UK is still struggling to turn the agreement in principle about the terms of its exit from the European Union into practical legal provisions. In the circumstances, it is very hard to predict exactly when the upcoming rate hike will take place, despite high inflation and a very low unemployment rate.
    The economic upturn continues even though growth peaked in 2017 at the highest level in 15 years. Growth is still higher than its long-term potential, and is expected to hold above 2% in 2018. The labour market is very dynamic, although the size of job creations also reflects weak productivity gains. The banking and public finance situations are improving steadily. Under this environment, Portugal gradually regains favour with the main rating agencies. Compared to the first months of 2017, the easing of sovereign rates has been spectacular.
    16 April 2018
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    High confidence levels, a global economic upswing, cautious central banks, sustained job creation and companies’ stepped up investments: enough reasons to feel comfortable when assessing the outlook for world economic growth. Yet a feeling of unease has been on the rise in recent weeks. The softening of sentiment indicators confronts us with the question of what happens after the peak. Is the flattening of the yield curve in the US a harbinger of bad weather to come? Should the share price decline of certain tech companies be read with the experience of TMT stocks in 2000 in mind? Will US inflation end up overshooting the Fed’s objective? And last but not least, to what level will the trade disputes escalate?
    The United States is tightening its trade policy and moving increasingly away from the rules of the World Trade Organisation. After applauding President Trump’s tax cuts, the equity markets are less charmed by his protectionist threats. The transnational imbrication of trade means that it is unlikely to contract, but the atmosphere has certainly become more conflictual. For the moment, the US economy continues to boom. With GDP growth forecast at 3% in 2018, the economy is entering its ninth year of expansion. It is also beginning to show a few signs of tensions, which are likely to encourage the Federal Reserve to continue tightening its monetary policy gradually.
    The recovery is expected to continue at a robust pace in 2018. In any case, that is what the most recent confidence surveys indicate. From a more fundamental perspective, the absence of inflationary pressure suggests that the economy still has some unused resources. Persistently robust growth raises questions about the true levels of the output gap and potential growth rate. This double uncertainty explains why patience, persistence and prudence remain the ECB’s watchwords despite strong growth.
    Despite the strong recovery, the newly formed grand coalition agreed on an expansive fiscal policy. Infrastructure investment is stepped up and support to families and pensioners increased. On Europe, the coalition remains in favour of the Growth and Stability Pact. However, in the short-term the macroeconomic effects of the programme are likely to be limited, as the economy is already operating at full capacity. In the long-term, the economy should benefit from the investment in infrastructure. Enterprises might hold back on investing in Germany given the tight labour market, generous pay deals and high corporate taxation.
    In 2017, French growth moved up a gear: it reached 2% in annual average terms, after 1.1% in 2016, and accelerated in the fourth quarter to a pace close to 3% a year. 2018 is expected to be another year of strong growth (2.3%, in annual average terms, according to our forecasts) but with a different quarterly pattern and breakdown. Indeed, we see growth plateauing or decelerating slightly from one quarter to the next. The surveys data available for the first months of the 2018 are sending a similar message of a likely peak in growth in Q1. In terms of its engines, we expect average annual growth to be supported by an acceleration in household consumption and exports which would take over from private investment.
    The recovery has become more self-sustained, benefiting from stronger domestic demand and net exports turning positive again. In 2017, real GDP rose by 1.5%. Labour market conditions further improved, supporting household expenditure. Favourable financing conditions and fiscal incentives continued to bolster expenditure on capital goods and advanced digital technologies. In 2017 the number of housing transactions increased for the fourth year in a row, albeit at a slower rate than in the past. Several indicators predict a mild improvement in the real estate sector’s general conditions in the months to come.
    Seven years after Fukushima, Japan has seen a rebound in activity driven mainly by the international environment, but also by the expansionist policy of its Prime Minister, Shinzo Abe. Exports are running at full throttle, unemployment is down to a tiny proportion of the active population, and the stock market is nearing record highs. However, behind this economic upturn, the backdrop has changed little. Heavy, recurring public deficits, massive debt, low SME productivity, poor resource allocation, labour market duality, low female labour participation… the Japanese economy still faces a number of chronic problems at a time when population ageing is accelerating.
    Despite the current economic recovery and a persistently favourable international environment, it is still premature to hope for sustainable fiscal consolidation. The errors of fiscal policy in past years have left their mark in the form of deteriorated public finances. The new administration that will take power in January 2019 will face the formidable task of meeting high social expectations while laying down fiscal targets that reassure investors. Structural reforms will have to be reintroduced, such as the pension reform that was swept under the carpet by the Termer administration. Without structural reforms, Brazil’s public finance trajectory could become unsustainable in the medium to long term.
    Russia consolidated its macroeconomic fundamentals in 2017. The economy swung into growth of 1.5% after contracting 0.2% in 2016. The fiscal deficit narrowed sharply to 1.4% of GDP thanks not only to higher oil and gas revenues but also to spending cutbacks. The central bank has demonstrated its capacity to face up to rising credit risks and troubled banks. The creation of a “bad bank” should help clean up the banking sector even further. Despite persistently strong headwinds that are preventing growth from accelerating, the rating agency Standard & Poor’s has upgraded Russia’s sovereign rating to BBB-. However, new US sanctions against oligarchs should weigh on economic growth.
    On the positive side, growth is accelerating rapidly and should return to levels close to the potential growth rate as of fiscal year 2018/19. Private investment finally seems to be entering a sustainable recovery. As part of a bank recapitalisation plan, public banks, whose asset quality has deteriorated further, received an injection of nearly USD 14 bn in March, which should help ease the pressures on the most fragile banks and bolster the rebound in investment. On the negative side, the government has taken a pause from the consolidation of public finances. The current account deficit has widened slightly, reflecting a deterioration in the terms of trade and a decline in export market shares.
    Trade tensions between China and the US are growing. China continues to enjoy a very strong external financial position, and exports to the US account for only 4% of its GDP. Therefore, any implementation of tariff hikes by the US should have a moderate direct impact on China’s macroeconomic performance. However, protectionist measures could dampen its export growth and constrain the industry’s efforts to climb the value chain, whereas China is starting to see a slight loss of its world market share. Moreover, weaker-than-expected growth in exports and GDP could shake the determination of the authorities to slow the rise in domestic debt.
    Greece is preparing to exit the European bailout programme. Activity is slowly picking up, driven by a positive economic environment and renewed confidence boosted by the programme’s smooth progress and prospects of it coming to an end. The country must now kick start its economic recovery. Greece has a large budget surplus before debt interest payments, and is preparing its return to the capital markets. Public debt is high (180% of GDP), but will only be refinanced very gradually. Negotiations currently in progress with Brussels could further strengthen its sustainability.
    Economic growth is expected to accelerate slightly in 2018 as Norway benefits from the favourable cyclical environment of its main trading partners. Investment is also expected to boost activity thanks to favourable growth prospects and persistently advantageous financing conditions. Job creations and wage growth are expected to boost household consumption while the government will make use of a more favourable environment to pursue a less expansionist fiscal policy.
    25 January 2018
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    It looks like 2018 will be a year of strong growth across the globe, with very few countries left behind. In the United States and the eurozone, business climate indicators are close to the peaks last seen in the mid-2000s. Although pressure on production capacity has been rather mild so far, business leaders are beginning to feel it more acutely. Asset prices – both financial and real estate – continue to rise, and some now fear the emergence of bubbles. The time is ripe for the normalisation of monetary policies. The central banks are cautiously pulling out of the government bond market, which is likely to spark an upturn in interest rates. This risks placing a damper on activity as of 2019.
    The US economy is being fuelled by oil and debt, a familiar story. Growth is expected to approach 3% in 2018, which is no longer such a common feat. The massive tax cuts approved by Congress will support growth in the short term. But they will also widen the Federal deficit, which could pave the way for higher interest rates. The Fed is expected to continue tightening its monetary policy, in keeping with the moves initiated by Fed chairwoman Janet Yellen, who will be replaced in February by Jerome Powell.
    We expect growth to remain robust in 2018. In addition to a solid, self-sustaining cyclical recovery, the monetary environment is especially favourable, despite the central bank’s reduction in the monthly volume of security purchases (QE). Persistently low inflation means that European growth has not yet run up against supply-side constraints, and justifies maintaining an accommodating monetary policy. Yet the cyclical recovery should not mask the need for the eurozone to strengthen its institutions.
    The economy is booming and even showing signs of overheating. Wage costs have been rising, in particular in sectors which have been confronted with severe labour shortages. Nevertheless, in the framework of negotiations to form a new coalition government, the CDU/CSU and SPD agreed on delivering a substantial fiscal boost. The coalition could be in place by mid-March. After strong growth in 2018, the economy is expected to slow substantially next year, because of shortages of production capacity and skilled labour and of monetary tightening in the US and in Europe.
    Supported by robust domestic demand and rapid global growth, the French economy continues to grow at a decent pace, even showing signs of acceleration on the eve of the new year. We expect its growth rate to reach 2% in annual average terms this year, from 1.9% in 2017. A cornerstone of our scenario is the expected continued strength of private sector employment. It is a key support of purchasing power gains while the net impact of fiscal policy is a matter of some debate, even if this net impact should nonetheless prove limited. Thanks to job gains, the unemployment rate should continue to decline, and household consumption should regain the dynamism it has lacked thus far.
    Domestic demand remains the main driver of the Italian recovery. Investment rebounded, rising by 3% in Q3 2017, and private consumption moderately increased. Strong demand from non-EU countries sustained Italian sales abroad, with a positive contribution of net exports to the overall growth. In 2018, as well as in 2017, the economy is expected to increase by about 1.5%. Micro-firms in Italy remain the backbone of the productive system: they account for 95% of total firms (97% in services), employ 46.8% of total workers (ranging from 23.1% in industry to 66.7% in construction) and produce 29.7% of total value added (52% in construction).
    Economic activity across the country as a whole does not really seem to have suffered from the crisis in Catalonia. Against a background of an extremely vigorous European economy, Spain’s growth has remained solid and the manufacturing sector has accelerated. The unemployment rate continues to fall. In Catalonia, the regional elections did not provide a decisive factor to identify a route out of the crisis. Political pressure is forcing each side to take tough positions. In the short term dialogue is likely to be strained and unproductive, maintaining a climate of uncertainty around the Catalan question.
    Brazil’s economy expanded for the third consecutive quarter in Q3 2017 after eight quarters of recession. Our scenario continues to favour a gradual rebound in activity in 2018, buoyed by domestic and global demand. Inflation is under control and monetary easing is winding down. Yet with reforms on hold and elections wrapped in uncertainty, the financial markets may be in for a rough ride in the months ahead. Despite job market improvements in 2017, the economic and political crisis has left deep social and psychological scars that could raise the spectre of a radical election outcome, jeopardising what is already a challenging macroeconomic and fiscal consolidation in 2019.
    Economic growth slowed in the third quarter and all the indicators suggest that this slowdown continued in the final quarter. The economy is still driven by domestic demand, whilst investment has stalled, despite more favourable monetary conditions. The sharp fall in inflationary pressures (reducing inflation below the central bank’s target) has allowed the monetary authorities to cut policy interest rates by 225 basis points. The government continues to focus on the control of public spending in order to reduce its deficit and rebuild its sovereign wealth fund. It hopes to use this fund to uncouple its spending from oil revenue from 2019 onwards.
    Economic growth rebounded slightly in India in the second quarter of fiscal year 2017/18. Third-quarter indicators confirmed this recovery, which is driven by industry’s dynamic momentum. In contrast, household consumption slowed and private investment is struggling to pick up again, despite a more favourable institutional and monetary environment than in the year-earlier period. Moreover, with rising inflationary pressures and the risk of budget overruns, the central bank might decide to tighten monetary policy. Despite the economic slowdown and growing social tensions, the NDA, the ruling coalition party, could win a majority in Parliament’s upper house before the 2019 general elections.
    China reported economic growth of 6.9% in 2017, up from 6.7% in 2016, according to the figures released on January 18th. The impact of policy stimulus measures on domestic demand and then the rebound in exports contributed to this slight upturn. However, the slowdown trend at work since 2010 started to resume again in H2 2017. It is expected to extend into 2018 as a consequence of structural factors and tighter domestic credit conditions. Getting “better quality” economic growth, attenuating financial risks and reducing corporate debt must remain the top priorities of the authorities. Yet there will continue to be uncertainty for quite some time over their determination to make the economy less dependent on credit at the price of slower growth.
    The Dutch economy is experiencing a strong recovery. This bodes well for the new four party centre-right coalition that took over end October. The government aims at keeping a small budget surplus. Household and business will profit from substantial tax reductions. On Europe, the government would like a return of the strict rules of the Maastricht treaty. Growth is expected to remain strong in the coming years. However, production constraints are likely to appear. As a result, wage should rise more rapidly and inflation could reach 2%.
    Having pointed in the wrong direction last autumn, economic indicators have rebounded slightly since. As we move into 2018, the UK economy is growing only slowly, but has not completely stalled. The fall in the pound has stopped. Is this just a temporary respite? The Brexit process is now moving into its second, and more difficult, phase. This will see the definition of the future framework of relations between the United Kingdom and European Union, with a view to agreement in October 2018 prior to effective withdrawal in March 2019. The main risk is of deadlock; negotiators have very limited time in which to reconcile positions which are still very divergent.
    18 October 2017
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    Economic growth is accelerating in various parts of the world, from Europe and the Americas to Asia, and this renewed activity is buoying international trade and the financial markets. The recovery has moved beyond a nascent phase, including in the eurozone, where it is fuelled by consumption and lending. Inflationary pressures are still mild, however, except to a certain degree in Germany. Under this environment, the central banks are cautiously normalising their monetary policies, with the Federal Reserve reducing the size of its balance sheet and the ECB curbing its expansion. As a result, bond yields are unlikely to come under much upward pressure.
    The economy continues to grow at a moderate pace and unemployment is declining. Other than some monthly disruptions (drop-off in industrial production and payroll employment; artificial rebound in wages; surge in pump prices), the series of devastating hurricanes is unlikely to affect underlying economic trends. One of these trends is the absence of price and wage pressures, which is hard to reconcile with an output gap that on the verge of closing. The Fed seems to have adopted the consensus point of view that the usual relationship between employment and prices has been temporarily halted. It still expects this relationship to return to normal again, but in the meantime, it is taking a cautious, go-slow approach to the process of normalising monetary policy.
    The recovery is continuing at a rapid pace based on current estimates of potential growth. The eurozone is making up ground lost during the crisis, which should eventually trigger an upturn in inflation towards the central bank’s target rate. So far, however, wages and prices have barely reacted to the cyclical upturn. Structural factors are probably at play (globalisation, technological innovations, etc.), but the ECB continues to see it as a sign of persistent underemployment. Consequently, it will maintain an accommodating policy next year, even though this support will be adjusted to take into account the strong cyclical performances.
    The CDU/CSU remained the largest party after the legislative election in September. As the SPD rules out participating in a grand coalition, the CDU/CSU will have to turn to the FDP and the Greens for forming a coalition. It will not be easy to find agreement between these three parties, because of major differences in policies concerning migration, Europe and climate change. Despite the political uncertainty, business cycle indicators remain well oriented. The economy is projected to grow rapidly thanks to strong domestic and external demand. Price pressures are increasing, as labour and capacity shortages have become more evident.
    The latest cyclical indicators released in recent months have been rather positive, with an ongoing improvement in business confidence, strong job growth, and another decline in the unemployment rate, which confirms the solidity of the recovery. Growth prospects look also bright for both the near term and the year 2018, despite a few clouds on the horizon, like the sharp reduction in government-subsidised job contracts and, more generally, the consolidation measures planned in the 2018 finance bill. Yet this 2018 budget also contains numerous growth supportive measures, and the net overall effect should be neutral. Consequently, we are maintaining our forecasts of an average annual growth rate of 1.7% in both 2017 and 2018.
    During the first part of 2017, domestic demand remained the main driver of the continued recovery which is spreading across sectors and becoming more sustainable. Consumer and business confidence has improved. The government has recently approved the Economic and Financial Document, expecting GDP to grow by 1.5% both in 2017 and 2018. This would allow the budget deficit to GDP to narrow to 1.6% of GDP at the end of next year. In June 2017 employment reached the threshold of 23 million, almost back to pre-crisis levels. As for the labour force, there has been a significant shift in the composition by age.
    Economic growth remains strong, despite a surge in inflation that is cutting into household purchasing power. The economy would hardly have a cloud on the horizon if it were not for Catalonia, one of Spain’s regional powerhouses, which has hurtled itself into a major political crisis. The Catalan question can be seen in part as the legacy of the economic crisis that swept Spain ten years ago, although it is more as well. The referendum ended up radicalising the conflict. Apparently the time has come for de-escalation, but starting a veritable dialogue between the central and regional authorities will be a long and difficult process.
    The recession is technically over. After eight quarters of contraction, real GDP rebounded in H1 2017. Households have seen a gradual improvement of their financial statements, but corporations and the public sector are still having trouble. Economic recovery has not yet firmly taken root, which, combined with disinflation, should encourage the central bank to continue to ease its monetary policy. Assuming no further escalation in the political crisis, an orderly election process next year, further deployment of reforms, supportive monetary policy, and a still benign global environment, we expect GDP growth to accelerate gradually, propelled by consumption and exports.
    The economy continues to consolidate. Economic growth accelerated significantly in Q2 2017, and inflationary pressures fell sharply, allowing the central bank to lower its key rates by 150 basis points since the beginning of the year. Although the banking sector is still in a fragile situation, it continued to improve in H1 2017. The share of risky assets is declining, the supply of new loans is accelerating, and bank profitability is picking up. At the same time, the government is still determined to consolidate public finances, as illustrated by the decline in the fiscal deficit (even excluding oil and natural gas revenues). Under this environment, Fitch switched to a positive outlook for its sovereign rating for Russia.
    Economic activity has slowed sharply since January. This deceleration is the result of the combination of two temporary shocks: demonetisation and the introduction of GST. However, it also reflects a slowdown in investment, which continues to be hampered by overcapacity in manufacturing industry and the growing problems at public-sector banks. The government’s scope of action to stimulate activity and support its banks remains limited if it wants to avoid weakening the public finances. The deficit for the first five months of the 2018 fiscal year is already 96% of the full-year target. In addition, government finances could be significantly affected by the writing off of loans to farmers.
    The authorities have activated all leverages to guarantee stability in 2017, in preparation for this month’s 19th National Congress of the Communist Party. Economic growth accelerated slightly in the first half. In the financial system, monetary and regulatory tightening has triggered deleveraging among banks and non-bank institutions, which should help curtail some of their most risky activities. While household debt continues to rise, but remains moderate, the increase in corporate debt has slowed. The authorities have also managed to reduce capital outflows and to stop the fall in foreign exchange reserves, while the yuan has rebounded against the dollar since the beginning of the year.
    Not all Austrians are benefiting from the current economic upturn. Although unemployment has been diminishing, low skilled workers find it increasingly difficult to get a job. Moreover, their relative income position has been deteriorating. This has resulted in a decline in popularity of the outgoing grand coalition. By campaigning on an anti-immigration platform, the ÖVP (liberal conservative) won the general election and will try to form a new coalition with the FPÖ (populist right). If successful, this coalition will aim for tighter immigration policies and lower taxes. In 2018, growth could ease to 1.7%, as the impact of the 2016 tax reform is diminishing.
    Growth is stable, with domestic demand compensating weaker trade prospects. Job growth sustained its strong trajectory of the last quarters. So far, 62 000 jobs were created since the start of the Michel I-government, with another 80 000 expected before the end of the current legislation. With wages back on the rise, we expect increasing disposable income to fuel private consumption for the foreseeable future. With both profit metrics and capacity constraints at multi-year high’s, non-financial corporations are spurring on investment growth. In spite of the low rate environment government investments are still lagging behind, with general infrastructure quality suffering as a result.
    11 July 2017
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    A wave of optimism is sweeping the economy, especially in the eurozone, where growth is accelerating and spreading to all member countries. As we enter summer 2017, all economic indicators are looking upbeat, job creations are picking up, and unemployment is declining at a faster pace. The horizon looks bright, with just one exception, China, where a few clouds are forming. Beijing is taking action to curb credit growth again, which is bound to strain activity, notably in the real estate sector. Heavy industry is already showing a few signs of relapsing, and global commodity prices are easing.
    Growth entered what has become a compulsory slowdown in the first part of the year, this time due to household consumption. The prospects of a rebound are real, but limited, which means the year 2017 could prove to be disappointing. In the months ahead, the risks are concentrated in the housing market, which is showing the first signs of reacting to higher mortgage rates. Even so, the Fed continues to normalise monetary policy, after outlining the next steps for unwinding its balance sheet, albeit without specifying a timetable. And for good reason: it must make a conclusive analysis of the fundamental causes of the current slowdown in inflation.
    In the eurozone, economic growth is increasingly solid, in terms of both its pace and composition. The acceleration of job creations and the upturn in the investment rate are increasing the recovery’s resistance to external shocks. The ECB has acknowledged this improvement, first by dropping reference lower policy rates in the future, and then by saying it is prepared to adjust its policy to the cyclical upturn. Despite this optimism, however, caution is still called for, notably given the uncertainty surrounding the extent of underemployed production capacity.
    Supported by an accommodative fiscal and monetary policy stance, the upturn in world trade and low energy prices, the economic upturn gained momentum at the beginning of the year. These favourable conditions should remain in place in the coming quarters. The economy should maintain its robust growth rate, largely driven by domestic demand. Shortages of skilled workers are likely to become more acute, which will drive up wage settlements and inflation. However, the low interest environment may create new risks, such as over-indebtedness, a misallocation of capital and overvalued asset prices.
    French GDP growth is showing clear acceleration. In 2017, it is likely to average 1.6% over the year (from 1.1% in 2016), a figure that has been upgraded thanks to a robust carry-over and solid economic trends: confidence surveys have improved markedly, employment is growing strongly, unemployment is falling, and the real estate market is in much better shape. Monetary and financial conditions remain favourable. Global growth is firming up. Exports and investment promise to be the engines of growth in 2017, whilst household spending will slow down under the influence of rising inflation. However, inflation is still low, and continues to be held down by the persistence of substantial excess capacity in the economy.
    At the beginning of 2017, the Italian recovery gained some momentum, with GDP accelerating to 1.2% y/y, strongest performance since 2011. Private consumption was up 0.5% q/q, supported by the strong demand for durable goods. Fixed investment unexpectedly declined, as Italian firms remained extremely cautious. The Italian labour market is often seen as characterised by a low participation of women. Admittedly, they represent only 41.6% of the employed people. That is more than 12 percentage points lower than the European average. Still, details show that the gap is way less marked when only the highest-educated women are taken into account.
    The recovery is broad-based and firmly entrenched. It continues to make headway at a relatively rapid pace, and so far it has not shown any of the expected signs of faltering after two years in which GDP growth topped 3%. Underlying inflation is picking up slowly. Job creation continues apace, but given the specific characteristics of the crisis in Spain, there is still a very long way to go before the unemployment rate and its long-term component are back down at acceptable levels. The state of Spain’s public finances is gradually improving thanks to the boost provided by growth. The deficit will be cut to below 3% of GDP by 2018 at the latest.
    The political and legal saga that has shaken the country over the past three years is perpetually postponing the normalisation of the institutional environment. Accusations against the President are unlikely to prevent him from finishing his mandate, and the financial markets have reacted less virulently than during previous episodes. But the smooth implementation of structural reforms and the confidence of economic agents and investors are critical for fostering a solid, sustainable economic recovery. Faced with another bout of uncertainty, the central bank continues to support monetary easing in a persistently disinflationary environment.
    Russia’s macroeconomic situation has consolidated significantly in recent months. Real GDP growth accelerated to 0.5% year-on-year in Q1 2017, and the latest indicators point to an upturn in household consumption in early Q2 2017. The banking sector situation has stabilised since the end of last year, which should help support the recovery in H2 2017. Moreover, in the first five months of fiscal year 2017, the deficit has narrowed sharply, thanks to higher oil and natural gas revenues and cutbacks in spending. The Russian authorities have also begun to rebuild the reserve fund, using surplus fiscal revenues, without placing a strain on the rouble.
    Economic growth slowed in the fourth quarter of fiscal year 2016/2017. This slowdown is only partly due to the demonetisation process. As of September, investment began to slow and the production of capital goods to decline. Looking beyond the difficulties of some corporates, the deterioration in the quality of bank assets has placed a heavy strain on loan distribution. Faced with this situation, the government adopted a new measure to increase the central bank’s role in managing non-performing loans. Although this measure should accelerate the debt resolution process, it will not offset the major capital needs of the state-owned banks.
    Monetary tightening and a stricter prudential and regulatory framework for the financial sector should curb domestic credit growth in 2017. For the time being, the main consequences are a slowdown in interbank financing, a bond market correction and the slower expansion of certain shadow banking activities. Commercial bank loan growth has not really decelerated yet. The slower growth in the real estate sector in recent months could spread to other sectors that are credit-dependent, and economic growth is likely to slow again in the quarters ahead.
    Growth has accelerated significantly over recent quarters, and has now reached the upper echelons of eurozone growth. Employment has recovered sharply, which has pushed the consumer confidence index to a record high. A sign of an economy now ready to take full advantage of favourable conditions, this trend should facilitate the continuation of adjustments that remain necessary. The fragilities of the Portuguese economy have not disappeared, but the conditions are now in place to reduce them. Having recently exited the excessive deficit procedure, the country will nevertheless need to ensure it puts its government debt on a clear downward path.
    Tailwinds are set to continue boosting Danish economy, keeping growth above its potential. As a result, GDP growth of close to 2% is anticipated this year. Exports should feel the benefit of supportive international conditions, while higher wages and employment are likely to boost disposable income and private consumption. Additionally, the Danish economy should continue benefiting from an accommodative monetary policy.
    25 April 2017
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    Economic indicators are picking up in most of the developed countries. Eurozone growth is more robust, at an annualised rate of nearly 2% in first-quarter 2017. The rebound is also better distributed, as the economic cycles of the 19 eurozone member countries are tending to move more in sync. The United States reported an upturn in oil and shale gas- related activities, and corporate investment in this sector probably rebounded at the beginning of the year. Inflation rebounds, approaching or overshooting the official 2% target. The central banks keep calm, however.
    It seems increasingly clear that there will be no fiscal stimulus, at least not in 2017. Attention is now focused on intrinsic economic trends. Survey results and production statistics are looking rather upbeat, but household consumption is slowing. In March, employment slowed sharply. Although it is too early for this to be a real source of concern, when taken in conjunction with inflation, which is no longer accelerating, it could provide the Fed with reasons for a break in the normalisation process. Yet there is no doubt that the Fed will seize every possible opportunity to move away from the ZLB. If prices and employment were to regain some strength in June, then the Fed could increase rates again, with hopes for a third one by the end of the year.
    The economic situation in the eurozone continues to improve: confidence surveys point to a very positive trend, although the latest “hard” economic data suggest that the prevailing optimism should be tempered somewhat. Our growth forecasts have been upgraded since the end of 2016. Yet, despite the economic improvement, labour market slack remains significant and results in very low inflation if we exclude the most volatile elements from the figures. With this in mind we continue to expect monetary policy to remain accommodating for some time, characterised by an extremely gradual withdrawal of non-conventional measures from January 2018.
    The German economy is performing very well. Growth in 2017 and 2018 is likely to remain close to 1.8%. Germany’s outperformance vis-à-vis the eurozone is often attributed to the reform programme Agenda 2010. However, the fall in unemployment has been accompanied by a rise of the working poor. The German Social Democratic Party has signalled that it wants to correct some of the reforms, as these have led to less secure and badly paid jobs. This could open an interesting debate on social justice and equity.
    The expected acceleration in growth in 2016 failed to materialise, pushing hopes into 2017. 2016 nevertheless ended on a robust growth performance which, at least, allows 2017 to get off to a good start. Confidence surveys have also been on the right track over the first quarter, though this positive signal has been offset by mediocre monthly activity figures. The overall picture to emerge from our forecasts is of somewhat more solid growth in France, thanks in particular to an improvement in the labour market. However, growth in 2017 will not be much higher than in 2016 (1.3% in annual average terms from 1.1%), held back by the pick-up in inflation.
    In 2016, activity grew by almost 1%, driven by domestic demand. Net exports kept on negatively contributing to the overall growth for the third year in a row. Gross fixed capital formation grew by about 3%, with spending on machinery and equipment increasing by almost 4%. Over the last three years, investment of non-financial corporations grew by EUR 11 bn, while the public component has further declined, from EUR 45 bn in 2011 to EUR 35 bn in 2016. Home prices increased in Q4 2016. Even if it was a limited increase, it is the first positive figure in five years. The news flow keeps on being positive. According to the Agenzia delle Entrate, more than 528,000 residential units were sold in 2016, almost 20% more than in 2015.
    After three years of recovery the Spanish economy will, over the next few months, finally return to the activity levels seen at the beginning of the financial crisis. This is not just a question of making up lost ground, given that the economy has seen profound transformations. The recovery will continue, but will be somewhat less vigorous than in the past. Now that the political situation has been clarified, the Spanish executive will step up its fiscal adjustment efforts. The tricky thing for Mariano Rajoy’s minority government will be finding the right dose.
    Economic activity was disappointing again in late 2016, bringing the contraction in GDP to an average of 3.6% for the year. Yet there are increasing signs that the economy is pulling out of recession, lending credibility to the hypothesis of a very gradual upturn in economic activity in the quarters ahead. Restricted in recent years by inflationary pressures and budget overruns, the central bank now has free reign to ease monetary conditions (good cop). A stronger real, rapid disinflation and the highly awaited decline in real interest rates are all support factors for a recovery, unlike fiscal austerity (bad cop), which is nonetheless essential for the credibility of the policy mix.
    Russia’s macroeconomic situation has consolidated. After a 2-year recession, the Russian economy swung back into growth in fourth-quarter 2016, inflationary pressures dropped sharply allowing the central bank to ease monetary policy, the rouble has appreciated significantly over the past twelve months, and the government launched a major programme to consolidate public finances. In the light of this new environment, the rating agency Standard & Poor’s attached a positive outlook to Russia’s sovereign rating, suggesting that it could soon be upgraded to “investment grade” if the country’s macroeconomic situation continues to strengthen.
    The withdrawal of 500 and 1000 rupee notes does not seem to have had much of an impact on economic activity or on Narendra Modi’s popularity. His BJP party won a major victory in legislative elections in Uttar Pradesh, India’s most heavily populated state. Although Mr. Modi still falls short of a majority in the upper house of parliament, this victory nonetheless consolidates his power: he now controls 17 states and two union territories. Despite demonetisation, GDP growth reached 7% year-on-year in the third quarter of fiscal 2016/17, buoyed by robust domestic demand. Nonetheless, the difficulties of public-sector banks still seem to be squeezing financing for corporate investment.
    Economic growth has picked up slightly over the past two quarters, supported by the authorities’ stimulus policy measures. In Q1 2017, the growth acceleration was fuelled by a rebound in industrial activity, lifted by stronger domestic demand and an upturn in exports. This cyclical strengthening has enabled the central bank to start to tighten monetary policy cautiously, in response to the continued rise in credit risks and liquidity risks in the financial sector. However, downside risks to short-term economic growth prospects remain high, and the authorities’ determination to contain financial risks could be tested rapidly in case of another slowdown in economic activity.
    Brexit hasn’t happened yet, but the countdown has begun. The UK and the EU-27 have two years to unwind relations that are proving to be much closer and more complex than British voters imagined when they voted in the June 2016 referendum. The ball is now in the European’s court. Parliament seems to have heard the European Commission’s call for unity. A special Council meeting has been called and the talks will begin. As the days go by, the inextricability of UK-EU relations is becoming increasingly clear, and the UK government seems to be reluctantly accepting that it will have to make inevitable sacrifices. Negotiations will be complex against the backdrop of a slowing economy, as Sterling’s depreciation erodes household purchasing power and consumer spending…
    Growth is accelerating, fuelled by domestic demand. Supported by job-creation and consumer confidence, private consumption is picking up, and will continue to remain one of the main growth engines. Structural labour market problems - participation of the elderly and of non-EU workers - still exist, however. High operating surpluses, low interest rates and increasing capacity utilisation rates are spurring credit growth. Brexit-related uncertainties are the main downside risks. Public debt is still high. Last year’s loosening of the fiscal stance does not bode well for those hoping for a lower indebtedness anytime soon.
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